TREASURIES -US two-year yields dip after surprise drop in private-sector jobs

By Gertrude Chavez-Dreyfuss

NEW YORK, July 2 (Reuters) - U.S. Treasury two-year yields slipped on Wednesday after data showed an unexpected drop in private-sector jobs last month, cementing the chances of a rate cut from the Federal Reserve at least at the September meeting.

U.S. two-year yields, which track interest rate expectations, were slightly down at 3.77% US2YT=RR. The benchmark 10-year yield, on the other hand, came off highs following the report, and was last up 4.2 bps at 4.291% US10YT=RR.

Private payrolls dropped by 33,000 jobs last month after a downwardly revised 29,000 increase in May, according to the ADP National Employment Report. Economists polled by Reuters had forecast private employment increasing 95,000 following a previously reported gain of 37,000 in May.

"The ADP report increased the odds of a downside surprise in Thursday's nonfarm payroll release," wrote Jeffrey J. Roach, chief economist at LPL Financial in emailed comments after the data.

"Investor jitters could be a catalyst for a drop in yields tomorrow if the jobs report is weaker than expected. I expect a weaker-than-consensus report, increasing the odds the Fed cuts three times this year."

Futures tied to the benchmark fed funds rate lifted the chances of a rate cut by the July policy meeting, pricing in as much as a 27% chance of a July cut post-jobs data, according to LSEG estimates. It was last at 24%, compared with a roughly 20% just before the data release.

For the September meeting, the market has fully priced in a 25 basis-point rate decline.